Sometimes size does matter. There are industries where geographic diversity and large-scale operations produce benefits above and beyond a simple one-plus-one formula. Power generation is one of those businesses, and while NRG Energy's
NRG Energy announced Sunday that it will pay $5.8 billion for Texas Genco in a combination of cash and stock, in addition to assuming $2.5 billion in preexisting debt. According to management, the deal should be accretive on both an earnings and a cash flow basis in the first year; it should also help diversify NRG's cash flow sources.
NRG already owns about 15,000 megawatts of generating capacity, primarily in the northeast, south central, and western U.S. The company also has some overseas generating assets in places like Australia, Germany, and Brazil. Acquiring Texas Genco will nearly double NRG's domestic generating capacity to 24,000 megawatts, with all of the newly acquired facilities located in Texas.
It hasn't been easy for NRG to get to this point. Although currently near a 52-week high, NRG was one of the power producers forced into bankruptcy in the new millennium. Now hopefully smarter for the experience, NRG is looking to build itself into a sustainable player in the generation market. With this deal, NRG's generation capacity will be similar to that of Calpine
Interestingly, this deal may not be enough. Some in the industry believe that independent operators need upwards of 35,000 to 45,000 megawatts of capacity to compete effectively over the long term. That suggests to me that operators like Dynegy
Only time will tell whether this deal lives up to management's current heady optimism. But it does look like we're finally starting to see that much-discussed move toward energy industry consolidation. Smart investors know better than to dive into any old stock just because an industry is undergoing consolidation, but it's hard to argue with the idea that a well-reasoned pick in energy generation could pan out.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).